Some basic questions

• How much of risk coverage can one have?

• Can someone cover the same risk under separate
policies to make a gain after having a loss?
• Who is legally entitled to cover a risk?
• What if someone obtains a health insurance policy,
concealing material facts or suppressing vital
information and then makes a huge claim?
• How can insurers manage fraud claims?
RISKS THAT CAN
BE COVERED BY
INSURANCE
Property losses
 Fire & natural perils
 Terrorism, malicious damage
 Accidental damages
 Burglary
 Lost/misplaced property or loss of one out of a pair
 Transit loss
 Breakdown of machinery
 Loss of cultivation/plants/crops/animals
Liability losses
• General public liability
• Motor third party liability
• Employer’s liability
• Professional liability
• Product liability
• Carrier’s legal liability
Consequential losses
• Increased cost of working/production loss resulting
from :
• 1) Fire/natural perils
• 2) Burglary
• 3) Machinery breakdown
• 4) Deterioration of stock
Guarantees
• Fidelity risk
• Bank Guarantees
Legal doctrines of Insurance-
1
Example-1
 Sekhar, a middle-aged man of 40 years developed
breathlessness followed by excessive perspiration &
palpitation while he was at his work in the office. He was
immediately hospitalized and diagnosed for mild myocardial
infraction. He survived and was discharged after a week. For
a moment he was worried how his family would have carried
on, if something worse had happened. However, he was back
to work after taking rest for 15 days. His boss was kind
enough to shift him from the stressful Cashier’s job to the
back-office operations in Finance department so as to reduce
his workload.
 Concealing the above facts, he decided to go in for a Life
Insurance policy worth Rs.5 lacs through an agent who used
to visit him regularly, soliciting business. He declared in the
proposal-form of the Insurer that his health was in perfect
condition and was fortunate that the medical examination
arranged by them did not show up anything adverse,
resulting in their acceptance of his proposal. He unfortunately
had another cardiac arrest after 18 months, which was fatal.
Discuss admissibility of claim.
Example.2
 “Charisma” was a prize winning race-horse owned by
George Lindemann and was a title holder in many
events. Despite a string of lackluster performances for
the past ten months, its Insurance Policy for $250000 had
just been renewed.
Charisma’s lack of form continued, but in the 8th month
of taking the Policy, it developed intestinal colic,
resulting in its death. Lindemann put up a claim for the
Insured amount. Meanwhile the FBI was tipped off
about a racket involving deliberate killing of under-
performing race-horses and it was revealed that
Charisma was electrocuted to death (apparently the
symptoms could be disguised as that of colic).
Discuss admissibility of claim.
Analysis of illustrations 1 & 2
 In the first example, a person buying life insurance
suppressed material facts in the application to ensure that
the risk was accepted by insurers.
 In the second, everything was fine when insurance was
purchased for the life risk of race horse. However, during
currency of insurance contract, the racehorse owner got the
animal killed in order to claim insurance benefits.
 (In the first case, there was violation of doctrine of utmost
good faith while entering into insurance contract and in the
second, there was violation at the time of claiming
compensation)
DOCTRINE OF UTMOST GOOD
FAITH
(uberrimae fidei)
 Had its origin in Marine Insurance. By virtue of this principle, a much
higher degree of honesty & good faith is imposed on parties to
Insurance contract. Openness & duty to speak exists throughout
contract period, unlike commercial contracts.
 However, other ingredients of valid contracts must exist.
 Concealment/ suppression of material facts or misrepresentation
whether deliberate or innocent results in breach of utmost good faith
which makes the Insurance contract voidable at the option of the
Insurer.
 In the first example, there is suppression as well as misrepresentation
of material facts in the proposal by Sekhar while taking the Life
Insurance Policy.
 In the second, there is misrepresentation of material facts while
preferring the Claim for death of the race-horse Charisma.
Example.3
 Soubhagya Jewelers had appointed Mr. Bhaskar as their night-
watchman for a monthly salary of Rs.10000.After about 2 years
in their service, Bhaskar requested his employer to provide him
a loan of Rs.200000 and also 15 days leave for his daughter’s
marriage. His employer obliged, but on the condition that
Bhaskar would take out a Personal accident insurance Policy
for Rs.200000 making the employer as his nominee.
 The instructions were carried out and the watchman got his
loan. However, he did not join back for duty even after 3
months and it was rumored that he had left abroad for a more
lucrative job. Six months later, it was reported in the
newspapers that Bhaskar had met with an accidental death due
to drowning. His employer approached the Insurers for
compensation.
 What do you think about admissibility of claim?
Example.4
• Pankaj was getting concerned about the huge medical
expenses incurred on his family members each year
and hence decided to go in for a group health
insurance policy.
• When Insurers were approached, they agreed to offer
a policy covering Pankaj, his spouse, children and
even his dependent parents. However, they declined
to cover his nephew who was staying with him,
citing that there was no nearness of relation.
• Do you feel that Pankaj can legally fight it out?
Analysis of illustrations 3 & 4
 Insurers have restrictions on purchasers of policy.
 Who can insure someone’s life/health/property or liability risk?
 Only those with insurable interest.
 Who has it?
 Only owners of property (property insurance) or those having
potential liability (liability insurance) or anyone would incur a
loss in the event of an accident.
 Self, family members ( for property, liability, life & health
insurance). Other secured creditors of property.
 Doctrine of Insurable Interest
• By virtue of this principle, only a person who suffers a pecuniary loss
in the event of an occurrence can be granted insurance cover.
• Ownership supports Insurable interest because owners would lose
financially if their property is damaged or destroyed.
• Close family ties or marriage relationship indicate Insurable interest.
• Potential liability of employers for occupational injuries to employees
also supports Insurable interest.
• Secured creditors (like loaner bank for a housing loan) would have
Insurable interest in property as it serves as collateral for mortgage.
• In Life Insurance, a person could purchase a Policy for himself
naming anyone as beneficiary.
• However, when a person buying a Policy on the life of another ,the
person must have an Insurable interest in the Policy holder’s life.
• Generally insurable interest is required both at the time of risk
coverage and also at the time of loss, but there is exception in life &
marine insurance .
Example.5
• George aged about 35 was a middle-level executive in a giant Software
company with an annual pay packet in excess of Rs.25 lacs. He had conservative
spending habits and hence used to save a lot through investments. He used to
oblige agents of Insurance companies as well. He unfortunately met with a fatal
road accident. Though he was rushed to hospital and treated for 12 days, he did
not survive. After settling the hospital bill to the tune of Rs.100000,his body was
taken home to perform the last rites.
• His spouse on examining the locker in their bank was taken by surprise to see
as many as 10 Life Insurance Policies (of different Companies) in his name for a
total Sum Insured of Rs.2 crores. A Health Insurance Policy for Rs.3 Lacs was
also found.
• Meanwhile the employers had also insured late George against health risk, for
Rs.3 lacs, by taking a Group Policy from another Insurance company. Hence
they were requesting his spouse to hand over the hospitalization bills.
• Is Mrs. George eligible to get re-imbursement of medical expenses on both
Policies? Is she eligible to get Life Insurance claim to the extent of Rs.2 crores on
as many as 10 Policies?
Example 6
 Abhishek had purchased a brand new Maruti Swift car from
the Udupi showroom. Along with the new car, the dealer also
offered free insurance. Unaware of this, his financing bank,
Canara bank Udupi also purchased insurance for the vehicle.
 Unfortunately the car got burgled when it was only three
months old. When he reported the loss to his bank, they
revealed that they had purchased insurance coverage for it.
Abhishek was surprised that the car was insured under two
policies. He thought it was a good opportunity to make a gain
if he made claims on both policies.
Analysis of illustrations 5 & 6
• Can Mrs. George claim hospitalization cost under
both health insurance policies? Or should it be on the
policy taken by employer alone?
• Can Mrs. George make claims under the many life
insurance policies purchased by late husband
George?
• Can Abhishek claim burglary loss of motor car under
both policies?
 Principle of Indemnity
 States that an Insured would be compensated only to the actual
(measurable/quantifiable) extent of loss suffered or that he should not
profit from a loss. It applies to losses under property, liability, health
and guarantee claims.
 Life/Accident insurance as well as ‘Agreed-value’ insurance are
exceptions.
 In total loss property claims, basis of indemnification would be fair
market value or replacement cost less depreciation.
 In partial loss property claims, the basis of indemnification would be
Repair charges less depreciation.
 Life Insurance policies are essentially benefit policies and not
Indemnity Policies, since loss caused by death of a human is virtually
immeasurable.
 Principles of Subrogation & Contribution are corollaries of the
principle of Indemnity.